Sales tax collections would grow under Senate budget plan

Just months after adding sales tax to car repairs and other services, the state Senate wants to again change what services are taxed – a move that’s expected to add up to $80 million in revenue.

Senate leaders say the proposed tax change would address confusion about what services require a sales tax. Under the legislation that took effect in March, whether a service is taxed largely depends on whether the firm performing the service is also selling materials.

That means a service – unclogging a toilet, for example – is subject to sales tax with a company whose business is mostly sales but exempt if a customer hires someone who only does the service. The goal was to help businesses that hadn’t previously collected sales taxes, but some complained of an unfair system.

Under the Senate budget provision, sales tax would apply to repair, maintenance and installation services regardless of what type of business is involved. The Senate is scheduled to vote on the full budget bill Thursday; the House budget does not include a similar provision.

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“We’ve always tried not to pick winners and losers in our tax reform, and this is an example of that,” said Senate Finance Committee chairman Bob Rucho, a Mecklenburg County Republican. “We’re treating every business the same, which is what our intention was last year.”

A variety of services would remain exempt from sales tax under the bill, including landscaping services, cleaning and janitorial services, paving and sidewalk services, and towing. But with more businesses charging sales tax, legislative estimates show the Senate plan would bring in $35 million in additional revenue in the fiscal year beginning in July and $78 million the following year.

The revenue would partially offset the cost of the Senate’s income tax cut proposal, which would raise the standard deduction by up to $2,000 by 2017. That means a married couple would owe no income taxes on their first $17,500 in income. The tax cut would cost the state $145 million in the coming fiscal year and $205 million the following year.

Alexandra Sirota of the liberal N.C. Budget and Tax Center said the “tax swap” is an unfavorable trade for some.

The additional sales tax expansion, she said, is “going to affect the people who spend more of their income on goods and services, and that’s primarily low- and middle-income folks.”

“It’s certainly clear that there will be folks who don’t see a lower tax load and could see a higher tax load,” Sirota added.

Low-income people are unlikely to take advantage of an exemption in the Senate budget’s sales tax plan: Only the first $25,000 spent to repair a boat or aircraft would be taxed. That change would cost the state about $1 million in revenue.

Sen. Bill Cook, a Beaufort County Republican, said the exemption would have a positive effect on the state’s economy. “We need to encourage that industry to grow in North Carolina,” he said.

The Senate budget also eliminates a $17.6 million allocation for local governments. That money was intended to offset urban communities’ losses from a shift last year in how sales tax revenues are distributed.

The revenue shift provided more sales tax money to rural counties whose residents often go elsewhere for shopping. But legislators included a provision to make sure urban counties didn’t lose revenue by adding more money to the mix.

Rucho said the $17.6 million allocation is no longer needed because the expanded sales tax brought higher-than-expected revenue to local governments.

“That was supposed to be a backstop if the revenue wasn’t there,” he said.

No data was provided showing how the $17.6 million cut would affect individual counties and cities. A Wake County spokeswoman said the cut wouldn’t significantly impact Wake.

A final tax change included in the Senate budget involves corporate income taxes for service-oriented companies that do business in multiple states. The “market based sourcing” plan would base companies’ tax burden on the income they receive from customers in North Carolina – instead of their employment and capital investments in the state.

Some companies would benefit from the change and others could pay more. The change would bring the state an additional $10 million per year when fully implemented.

“It will incentivize the service businesses and the high-tech businesses to come to North Carolina because there is a significant advantage to being here,” Rucho said.

That provision has drawn outcry from TV and film companies. They could owe millions more in taxes because it would calculate their tax burden based on the size of their audience in North Carolina.